Morgan Stanley on USD, EUR, JPY, GBP, CAD, AUD, NZD for the coming week
USD: Fed Dovish Enough To Weaken USD. Neutral.
The Fed was dovish enough to support our weak USD view. The focus now shifts to the upcoming data which we expect will once again be worse than the Fed is hoping for and will prevent the Fed from hiking in December. Even if the Fed does hike, we expect it to be a compromise between the hawks and doves which is accompanied by dovish guidance about future hikes. We like selling USD against EM and G10 commodity currencies which are more likely to benefit from a dovish Fed and low G4 yields. A risk-off environment is another key risk to our view but we don't see any imminent catalysts to derail the risk rally.
EUR: Staying Bullish. Bullish.
We stick to the long EURUSD position* in our portfolio to express our bearish USD view. The low EMU yields and flat yield curves have hit banks' profitability, reducing their willingness to absorb foreign FX risk. This has resulted in banks closing and repatriating their foreign loan books which is EUR-supportive. Banks' foreign loan books growth has also slowed, indicating that long-term capital exports are insufficient to offset the commercial demand for EUR arising from the EMU's current account surplus. This, coupled with the ECB appearing to be on hold for now, supports our bullish EUR view. This week, we watch German Ifo and CPI.
JPY: USDJPY Lower For Now. Neutral.
The BoJ's change to its monetary policy framework this week is unlikely to change the near-term outlook for JPY as it still maintains NIRP and low long term interest rates as the BoJ policies. We think USDJPY can fall amidst a weak USD environment and no imminent catalyst for change in Japan. We think that for JPY to weaken significantly, higher inflation expectations are necessary to drive it. Further action by the MoF can be one way to improve the outlook.
GBP: Turning Cautious. Bearish.
While the demand side of the UK economy has held up better than expected post-Brexit, we have become more cautious on GBP. The latest BoE agents' survey reported that companies' investment intentions have fallen, supporting our view that UK growth will be weighed by the supply side of the economy, which will take a few quarters to be reflected in the economic data. Investors have also turned their attention back to Brexit as the government's negotiation position remains unclear, with risks tilted towards a hard Brexit which will significantly reduce the UK's access to the EU market. We prefer expressing our bearish GBP view through buying EURGBP.
CAD: Bearish Supported by BoC. Bearish.
We remain bearish on CAD, with the latest change in the BoC's stance adding support to our view. In its latest meeting, the BoC stated that inflation risks have tilted somewhat to the downside and growth may be somewhat lower than anticipated in July, softening the hawkish tone that it had been adopting so far despite weak economic data. This increases the possibility of the BoC cutting rates this year, especially since we are skeptical that exports can rebound enough in the second half of the year for the BoC to hit its forecasts. Given the markets are only pricing in 4bps of rate cuts for this year, and CAD has the largest long positioning in G10, we think further data weakness could weaken CAD significantly.
AUD: Further Upside. Bullish.
We think AUD has further room to appreciate against USD if risk remains supported as decent data is enough to keep the RBA on hold and investors seeking higher yielding assets. RBA assistant Governor Kent struck an upbeat tone this week and better than expected GDP growth (though with a mixed breakdown) as well as a falling UE rate are good enough to limit the risks of RBA rate cuts, despite a still worrisome inflation outlook. The RBA accord signed by new Gov. Lowe also emphasized their ability to take into account financial stability concerns when making monetary policy. With AUDUSD at 0.76, it still has room to go higher before the RBA becomes too worried about overvaluation.
NZD: RBNZ Not Stopping NZD Appreciation. Bullish.
The more dovish than expected RBNZ will not be enough to stop the upward NZD trend, in our view. The RBNZ changed its statement very little yesterday despite improving growth data and milk prices and also pointed to slowing house price appreciation. Nonetheless, we believe only an aggressive easing cycle will change the trend in NZD and we won't get more clarity on this until the November MPS. Inflation remains low, but even if the RBNZ does small amounts of easing, it is difficult for the central bank to weaken the currency in a time when markets are looking for anything high yield. . However, NZD remains vulnerable to a risk-off period.
